UK bond yields are back to where they were when Liz Truss was in No. 10 after a shocking inflation report prompted traders to bet on more rate hikes from the Bank of England.

The inflation rate came in higher than all economists forecast — sending wagers on future interest-rate hikes soaring and lifting yields to levels last seen when the former Prime Minister rattled markets with her unvetted mini-budget. 

The rate on 10-year securities now pays a premium of more than 50 basis points over equivalent US notes, around the biggest seen in more than a decade. A key part of the curve inverted the most since February, a sign bond traders are positioning for short-term borrowing costs to remain elevated for longer. 

“It’s a terrible inflation print that really sets the UK apart from other major developed economies,” said Derek Halpenny, head of research, global markets EMEA & international securities at MUFG Bank. “The scale of divergence on the inflation path risks undermining policy credibility.”

Eoin Treacy's view

The whole point of creating an ex-food and energy inflation measure was to reduce the impression inflation is out of control. We have rather the opposite condition at present because the core figure is breaking out to new highs while the broad measure is contracting. That’s not good news because the core measure is centred on shelter and services and only a steep recession is likely to have a meaningful effect on the price of either.